HVAC Labor Cost Percentage: What Should You Be Running?

Labor is usually the largest controllable cost in an HVAC business, which makes labor cost as a percentage of revenue one of the most important numbers to understand.

It tells you how much of every revenue dollar is being consumed by the cost of the people doing the work, and when it drifts too high it signals that something in your pricing, scheduling, or crew structure needs attention.

The problem is that most contractors calculate this number wrong, if they calculate it at all, because they use base wages instead of the fully burdened cost of labor, which understates the real figure significantly.

This post covers what labor cost percentage should look like for an HVAC business, how to calculate it correctly using burdened rates, and what the number tells you when it comes in higher or lower than the healthy range.

For the broader picture of HVAC margins and benchmarks, see HVAC Profit Margins: What's Normal and What's Not.

For the detail on how to track and allocate crew labor, see HVAC Payroll and Crew Cost Tracking.

What labor cost percentage measures

Labor cost as a percentage of revenue is your total labor cost divided by your total revenue over a given period. It measures how much of your revenue is consumed by the cost of the labor that produces the work, and it serves as a check on whether your pricing is keeping pace with what your crew actually costs.

The number matters because labor and materials are the two largest direct costs in HVAC, and of the two, labor is the one most directly tied to how you price and schedule.

Material costs are largely set by your suppliers, but labor cost as a percentage of revenue is something you influence through your pricing, your scheduling efficiency, and how well you manage non-billable time.

When the percentage is healthy, it means your pricing covers your labor with room to spare for materials, overhead, and profit.

When it's too high, it means labor is eating more of your revenue than the business can sustain, and the cause is almost always either underpricing or inefficiency.

Why burdened labor is the optimal way to calculate it

The single most common mistake in calculating labor cost percentage is using base wages instead of the fully burdened cost of labor, and it produces a number that's misleadingly low.

When you pay a technician a given hourly wage, the actual cost to your business is considerably higher once you add the employer share of payroll taxes, federal and state unemployment taxes, workers compensation premiums, and any benefits you provide.

For HVAC trades in Florida, the workers compensation component is especially significant because the state's rates for HVAC work are among the highest in the country, which pushes the burden well above what contractors in lower-rate states experience.

A technician's fully burdened cost commonly runs 30 to 50 percent above their base wage once everything is accounted for.

This means a labor cost percentage calculated on base wages can understate the real figure by a third or more.

A contractor who thinks labor is running 18 percent of revenue on a base-wage calculation might actually be running 25 percent or higher on a burdened basis, and that difference is the difference between a healthy business and one that's underwater on labor.

The optimal way to calculate labor cost percentage is to use the fully burdened cost, because that's what the labor actually costs you.

What a healthy labor cost percentage looks like

With burdened labor as the basis, here's what healthy ranges look like across the main types of HVAC work, keeping in mind these are general benchmarks and your right number depends on your specific business.

For residential install work, burdened labor commonly runs 18 to 28 percent of revenue.

Install work tends to carry a lower labor percentage than service because the equipment and material content is high, which means the revenue per job is large relative to the labor hours involved.

If your install labor percentage runs above 28 percent, the likely causes are underpricing your install jobs, crew inefficiency that stretches jobs longer than they should take, or scope creep where jobs consume more labor than was estimated and priced.

For residential service work, burdened labor commonly runs 25 to 35 percent of revenue. Service carries a higher labor percentage than install because the work is labor-intensive and the material content is low, so a larger share of each service dollar goes to the technician's time.

If your service labor percentage runs above 35 percent, the usual causes are underpricing service calls, low close rates that mean technicians spend time on calls that don't convert to billable work, or dispatch inefficiency that leaves technicians driving or waiting instead of working.

For commercial work, labor percentages vary widely depending on whether the work is commercial install (which can run similar to residential install) or commercial service contracts (which often carry higher labor percentages because of the relationship management and included site visits that don't directly generate revenue).

The Florida workers comp dynamic is worth repeating here, because it means a given labor cost percentage in Florida reflects tighter labor management than the same percentage would in a lower-rate state.

A Florida HVAC business running 25 percent burdened labor is managing labor more efficiently than the raw number suggests, because the workers comp component built into that 25 percent is structurally higher than what contractors elsewhere carry.

How to calculate it for your business

The calculation is total burdened labor cost divided by total revenue, but getting a useful number requires a few decisions.

Decide what labor to include.

The cleanest approach is including the burdened cost of all revenue-producing field labor, meaning technicians and install crew, while handling salaried supervisory roles like a service manager separately if their time spans both field work and management.

Office and administrative payroll should not be in this number, because that's overhead rather than direct labor cost. The goal is to capture the cost of the labor that directly produces the work.

Decide on the time period. Annual labor cost percentage is the standard for benchmarking, but tracking it monthly or quarterly lets you catch problems sooner and see how the number moves across the year.

In Florida, where the cooling season is long, monthly tracking shows you whether your labor efficiency holds up through the busy and slower stretches.

Make sure the labor cost is burdened. This is the step most contractors skip, and it's the one that matters most.

If your books or your payroll system don't already calculate burdened labor cost, you'll need to layer the payroll taxes, workers comp, and benefits onto base wages to get an accurate figure.

This is exactly the kind of thing clean books and proper job costing make straightforward, and the kind of thing that becomes a guessing exercise when the books are messy.

What the number tells you and how to act on it

When labor cost percentage runs high, the diagnosis usually comes down to either pricing or efficiency, and distinguishing between the two points you toward the right fix.

If your technicians are busy and productive but labor percentage is still high, the problem is almost certainly pricing. You're charging too little for the work relative to what the labor costs, and the fix is reviewing and raising your pricing rather than trying to squeeze more out of an already-productive crew. This is common in HVAC because so many contractors underprice out of fear of losing bids.

If labor percentage is high and your technicians have significant idle time, long drives between jobs, or low close rates, the problem is efficiency rather than pricing. The fix is better scheduling and dispatch, tighter routing to reduce drive time, and improving the rate at which service calls convert to billable work. Squeezing inefficiency out of the schedule lowers labor cost percentage without touching your prices.

Often it's a mix of both, and the only way to know how much of each is at play is to have job costing that shows you labor cost and labor hours by job, which lets you see whether jobs are being priced too low, taking too long, or both. Without that visibility, you're guessing at the cause and likely to apply the wrong fix.

The connection to pricing and the books

Labor cost percentage is one more HVAC benchmark where the number itself is simple but generating it correctly and acting on it well both depend on the quality of your books and job costing.

You can't calculate it accurately without burdened labor cost, which requires payroll and bookkeeping set up to capture the full burden.

You can't diagnose a high number without job costing that shows labor by job. And you can't tell whether a pricing or scheduling change actually helped without the financial visibility to track the number over time.

This is the same theme that runs through every HVAC benchmark. The metrics are easy to understand, but the contractors who actually use them to run more profitable businesses are the ones whose books give them clean, burdened, job-level data to work from, rather than base-wage approximations and gut feel.

At Prophet Accounting, we work with HVAC contractors and other home service trades across Port St. Lucie, the Treasure Coast, and nationwide.

We set up payroll and job costing that capture burdened labor cost correctly, which is what makes labor cost percentage an accurate and useful number rather than a misleading one.

If you're not confident your pricing actually covers what your crew costs, schedule a consultation at prophetaccounting.com/contractors.

For a quick read on monthly bookkeeping costs, our pricing calculator gives you a ballpark in about two minutes.